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The Recovery Delusion

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Last year, I was having a conversation with the economist - now Nobel laureate - Robert Shiller. He told me an interesting story about the time that the economics faculty at Yale was moved. "My own university," he told me, "used to have a Department of Sociology, Economics and Government but they split them into 3 departments. I think that was a momentous institutional change - it allowed economics to be cut off from other disciplines."

I was reminded of Shiller's anecdote when preparing to speak at the Bristol Festival of Economics where the question is how well-founded we feel the recovery to be. Of course, Mark Carney at the Bank of England tells us we are in recovery - but does anyone believe it? Are we convinced by the economic data?

To me, it feels entirely cut off from reality, like Shiller's economics department: no longer connected, physically or intellectually, with real life. Our banks are still mired in bad debt, with levels of capital that still don't make them safe - and most bankers, in private, acknowledge this readily. While the costs of running the banks has been reduced by massive layoffs, the institutions themselves are still too complex - which is why Jamie Dimon, widely considered the world's best banker, couldn't see multibillion dollar losses or take them seriously when they appeared. Frank Partnoy's forensic analysis of one of the smaller, more conservative banks - Wells Fargo - demonstrated that the balance sheets of these critical institutions are dangerously opaque while powerful arguments, such as Anat Admati's case that banks need to rely more on their owners' money and less on ours, have been ignored. The institutions still aren't safe and everyone in them knows it. "All of us will remain in the dark, neither understanding nor trusting the banks. And the rot will spread," is Partnoy's conclusion. And anyone who thinks that, since he's talking about U.S. banks, we needn't worry, clearly hasn't understood the global nature of the problems we have not solved.

Meanwhile Alan Greenspan, with all the psychological dexterity he manifested when acknowledging that his failure to regulate derivates was just 'a flaw' has argued that economics are just fine thanks - it's only finance that remains a mystery.

But in the real world, real wages continue to decline and are expected to do so for at least another 18 months - while prices rise. Not what I would call an economic recovery. Sainsbury's CEO Justin King sees this every day: the problem, he says, is that prices are going up and wages are going down. That's what drives the choice between heating and eating.

Meanwhile 1/3 of our 18 - 24 year olds have been out of work for more than a year and nearly half of the over fifties have been too. This is a tragic and perverse waste of talent and energy: resources a healthy economy needs and values. The labour market has become extremely polarized, with the few well-paid jobs at the top and a few more badly-paid jobs at the bottom and, increasingly, nothing in between. This polarization will be made worse by emerging technologies which are already eliminating the once safe havens of middle class employment: doctors, lawyers, accountants have seen and will continue to see vast swathes of their work done by robots and software. The paralegal has been replaced by Google, the surgeon by machinery and the accountant by algorithms. Even financial and sports journalism can now be cranked out effortlessly by software that can't be sent to jail.

Does this sound like recovery to you?

Carney also says that he's confident he can control the housing market if it gets overheated. If a ten percent jump in one month is control, I can't imagine what overheating will feel like. Nor can I foresee what kind of job would ever provide my children with a normal house in a safe neighbourhood that costs 20 times an average salary.

The numbers that proclaim recovery are of course GDP: that profoundly irrational statistic that sees more growth in disaster relief than disaster prevention, that grows with war and floods but never measures educational attainment or physical health. With a data point that skewed, it's no wonder our current bad news is trumpeted as good news.

When the crisis first started, I had one brief moment of hope. Perhaps, I thought, things will be so bad that they'll give government the impetus it needs truly to rebalance the economy. Perhaps now we will consume less - after all, we all know we need to - and really get green energy going. Perhaps we will rebalance this lopsided economy so that instead of putting all our nest eggs in the City of London's basket, we will finally appreciate the genius of the creative industries that make this country respected and loved around the world. Perhaps that's what a crisis is for: to make us do today the things we put off doing yesterday.

I would like to believe we are in recovery - who wouldn't? But I'd also like not to be wilfully blind this time. Inequality remains acute. We waste precious people and resources and the politicians who try to sell us this recovery only lose what shreds of credibility they cling to. We currently inhabit an economic system that serves few, is anachronistic and unproductive. We have done nothing to address those systemic issues. And we won't have a recovery until we do.